Facebook’s Valuation Reset Might Not Be Over

Shares could have at least another 20% to fall

Facebook (NASDAQ:FB) stock, which took a perilous fall Wednesday to continue its post-IPO plunge, basically were breaking even around midday Thursday.

After dropping nearly 36% since reaching opening-day highs around $45, might FB shares finally have found its footing? InvestorPlace‘s Rick Pendergraft thinks it’s possible; that the opening of FB options might have begun to establish some support levels.

However, to others, it still looks like Facebook stock could see further deterioration.

According to Bloomberg data, Facebook’s valuation still is not in line with its industry peers, and would need to fall about another 20% to be on par with other Internet businesses.

Facebook currently trades at 81 times earnings, which clearly is far ahead of a number of other top Internet stocks:

Company

Ticker

P/E Ratio

Priceline.com

PCLN

29

Google

GOOG

17

Yahoo

YHOO

17

eBay

EBAY

16

The only major Internet company that has a higher multiple than Facebook is Amazon.com (NASDAQ:AMZN), which trades at a whopping 173 times earnings!

True, a company can sell at a premium valuation if it can grow at a hefty rate, but confidence in Facebook isn’t exactly high on that front. Facebook recently has seen a deceleration of its revenues, and during the IPO roadshow, a Morgan Stanley (NYSE:MS) analyst lowered the guidance for FB’s second quarter and full year.

One problem is that Facebook’s traffic is rapidly moving toward mobile, which many companies are finding difficult to monetize. But Facebook’s payments business also might be an issue. Business Insider’s Henry Blodget has said FB could experience a slowdown because of the problems at Zynga (NASDAQ:ZNGA), which accounts for most of Facebook’s payments business.

Also, let’s not forget that Facebook’s CEO and co-founder Mark Zuckerberg has made it clear that he is not interested in short-term results. In other words, if revenues plunge because of mobile, don’t expect him to negotiate quick moves just to turn things around.

Which means it’s less likely that results will prop up the P/E, and more likely that the valuation (and stock price) could continue its plunge.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.